The presidential election is one factor contributing to uncertainty in the market.
The market has had a terrific year but has cooled its jets lately. The benchmark S&P 500 Index fell by a little less than 1% in October. One factor that could be preventing the market from extending its bull run is the looming U.S. presidential election. Polling suggests that the race between both Vice President Kamala Harris and former President Donald Trump is extremely close.
Regardless of who wins, billionaire investor Ken Griffin foresees new all-time highs for the market after the election. Here’s why.
The clearing of uncertainty
While it’s said that the market climbs a “wall of worry,” uncertainty seldom feels like your friend as an investor, and it can push many people to the sidelines. It’s especially daunting for professionals managing millions of dollars who can potentially lose their jobs if they have a bad year.
The presidential election between Harris and Trump has brought nothing but uncertainty. The race is tight, and both candidates would bring different regulatory regimes, tax policies, and other plans that could impact the economy and inflation to varying degrees. Investors probably prefer Trump’s tax plans because he would likely keep corporate taxes lower or at least at current levels, and try to extend tax cuts his administration implemented in 2017. However, investors are likely not as excited about Trump’s plans for tariffs; global markets struggled when Trump used them in his first term.
On the other hand, Harris will likely propose to raise the corporate tax rate and certain taxes on millionaires and billionaires. However, Harris has also proposed many plans to help the low- and middle-income classes, which could boost overall gross domestic product.
There will also be winners and losers in the stock market depending on who wins. The stakes are high for crypto, banking, home builders, and electric vehicles, among other sectors. Many investors are either trying to position or potentially hedge their portfolios based on which candidates they think will win, and other investors might be waiting until the election is over.
That seems to be what billionaire investor Ken Griffin thinks. Griffin is the CEO of Citadel, one of the largest hedge funds in the world, so Wall Street usually pays close attention. Speaking at the Future Investment Initiative forum in Saudi Arabia this week, Griffin said he believes the anticipation of the election has been more taxing than anything else:
The reduction in uncertainty is almost always positive for asset prices, and we’re at that moment of peak uncertainty in a race that Trump is favored to win but it’s almost a coin toss, so I would say that post election we’ll generally see a risk-on environment as people come to adapt and adopt a new regime whether it’s a Harris regime or a Trump regime, this uncertainty will be behind us.
Griffin may be on to something here. While the market has performed better or worse under certain parties and depending on who controls Congress, research from Vanguard did not find a statistical correlation between the performance of a common investment portfolio (60% stocks and 40% bonds) in presidential election years and years without elections.
There are so many different factors influencing markets at any given time that Vanguard believes it’s difficult to attribute market performance to one specific cause, even one as seemingly consequential as the U.S. presidential election.
Expect near-term volatility but don’t panic
The market will likely be volatile over the next several weeks due to many important factors, including the election, the upcoming Federal Reserve meeting, and ongoing geopolitical tensions. However, the conclusion of the election should allow the market to put one big uncertainty in the rearview, potentially paving the way for the market to extend its gains and reach new all-time highs. Long-term investors needn’t concern themselves with near-term volatility but should try to understand why it might be happening, so they are not caught off guard and therefore can make better decisions.
Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
